Alibaba cements its position ahead of IPO

Alibaba Group has emerged as the most profitable e-commerce firm in China with a net profit of US$3.5 billion for 2013, offering further proof of the success of its market segmentation strategy in the TMall marketplace and Taobao user trading platform.

Alibaba has scored over the other major Chinese internet rivals on the earnings front, given the US$2.5 billion annual profit posted by Tencent Holdings (00700.HK) and the US$1.6 billion profit of Baidu Inc (BIDU.US). The distinction on that vital parameter places the e-commerce group on a solid footing as it gears up for a mega US initial public offering (IPO).

Analysts reckon the strong earnings could drive the Hangzhou-based firm’s valuation further in the industry. According to recent reports, Alibaba could file the prospects for its US IPO as early as this week. The deal could be worth more more than US$16 billion, Reuters had reported.

While the picture looks good overall, some observers caution that Alibaba’s performance has been overly dependent on the Singles’ Day sales in China, which hit a record high last year. Chinese youth celebrate November 11 as the Singles’ Day, marking the festivities with a shopping spree.

Alibaba’s 2013 financial figures have come to light as the group’s major shareholder Yahoo Inc. announced its own results last week. The Yahoo filing showed Alibaba’s net profit jumped 140 percent from a year earlier to US$3.6 billion, as revenue surged 62.3 percent to US$7.95 billion.

Net profit margin was 44.7 percent, the highest among the big three internet firms in China. Tencent and Baidu had net margins of 25.6 percent and 32.9 percent, respectively, last year.

There is no doubt that Alibaba’s strong 2013 performance was in large part due to the massive response to its Single Day sales campaign in November. Record orders boosted the group’s fourth quarter sales by 66 percent to US$3 billion, making up for 38 percent of the company’s total annual sales. Net profit in the quarter surged 109 percent to US$1.36 billion.

While some analysts have praised Alibaba for breaking its sales record at the annual Singles’ Day shopping event, some are concerned about an over-reliance on a single event to drive sales, and question if such a thing will be sustainable.

That may be the reason why Alibaba is stepping up acquisitions of a range of businesses. The shopping spree includes stakes in TV and movie content provider China Vision Media Group, department store operator Intime Retail and digital mapping firm AutoNavi.

Brokerage firm CITIC CLSA has noted that Rakuten, Japan’s leading e-commerce company, has experienced a dilution of its earnings with investments in unfamiliar areas. However, Alibaba is focused on China, a market it is familiar with; so the acquisitions are likely to offer synergies with the group’s online ecosystem.

It is too early to tell whether the Tencent JD.com tie-up be a big challenge to Alibaba. But at least for now, JD is a long way behind in terms of profitability. The No. 2 mainland e-tailer reported a net loss of 50 million yuan for 2013 even as its revenue expanded to 69.3 billion yuan, three times the 2011 level.

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